Compliance August 2, 2022

Booz Allen Hamilton, Others Face Passive TDF Performance Lawsuits

Unlike many other ERISA lawsuits, the complaints suggest the plan fiduciaries in question should have considered more expensive target-date funds that might have performed better.

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A new Employee Retirement Income Security Act lawsuit has been filed in the U.S. District Court for the Eastern District of Virginia, naming as defendants Booz Allen Hamilton Inc., the company’s board of trustees and various committees tasked with operating the management and technology consulting firm’s defined contribution retirement plan.

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The complaint details the ERISA fiduciary duties and provides a general overview of the DC retirement plan marketplace in the U.S., especially the “mega” plan space in which the Booz Allen Hamilton plan operates, as it allegedly has more than $6 billion of participant assets invested. The complaint also includes an exposition about the differences between “to” retirement target-date funds and “through” retirement TDFs, citing Morningstar research to suggest that, of the 28 TDF suites launched in the past decade that remain active, nearly 80% have adopted a “through” approach.

According to the complaint, the plan lineup has, since March 2010, offered the BlackRock LifePath Index Funds, a suite of ten TDFs.

“The BlackRock TDFs are significantly worse performing than many of the mutual fund alternatives offered by TDF providers and, throughout the class period, could not have supported an expectation by prudent fiduciaries that their retention in the plan was justifiable,” the complaint states. “Defendants were responsible for crafting the plan lineup and could have chosen from a wide range of prudent alternative target-date families offered by competing TDF providers, which are readily available in the marketplace, but elected to retain the BlackRock TDFs instead, an imprudent decision that has deprived plan participants of significant growth in their retirement assets.”

Very similar allegations have been leveled in lawsuits against plan fiduciaries at Cisco, Citigroup, Wintrust and Stanley Black & Decker.

The Booz Allen Hamilton complaint alleges that “a simple weighing of the merits and features of all other available TDFs at the beginning of the class period” would have raised significant concerns for prudent fiduciaries. (BlackRock, while the subject of much discussion in the text of the lawsuit, is not named as a defendant.)

“In addition, any objective evaluation of the BlackRock TDFs would have resulted in the selection of a more consistent, better performing, and more appropriate TDF suite,” the complaint alleges. “Instead, as is currently in vogue, defendants appear to have chased the low fees charged by the BlackRock TDFs without any consideration of their ability to generate return. Had defendants carried out their responsibilities in a single-minded manner with an eye focused solely on the interests of the participants, they would have come to this conclusion and acted upon it.”

This argument is one aspect in which the ERISA lawsuit diverges from many that have been previously filed against large national employers. Whereas most of these cases argue that plan sponsors should have offered lower-fee funds, the argument here suggests that the plan sponsor defendants should have looked beyond fees.

“Since the fiduciaries here employed a fundamentally irrational decisionmaking process (i.e., inconsistent with their duty of prudence) based upon basic economics and established investment theory, they clearly breached their fiduciary duties under ERISA—which are well-understood to be the highest known to law,” the complaint states. “Exacerbating defendants’ imprudent decisions to add and retain the BlackRock TDFs is the suite’s designation as the plan’s qualified default investment alternative.”

The lawsuit also details BlackRock’s alleged investment methodology in the LifePath TDF suite, and suggests the TDFs are, in general, substantially more aggressive than many peer funds. Using a number of charts, it alleges that BlackRock’s performance has lagged that of other options, and that this should have triggered an investigation process and possible fund change on the part of the plan fiduciaries.

Booz Allen Hamilton has not yet responded to a request for comment about the complaint. The text of the lawsuit is available here.

Compliance August 2, 2022

IRS Life Expectancy Tables Updated for Retirees

The actuarial update is important for plan sponsor clients to note, but the effect to regular business is likely limited, as the individuals most affected are likely no longer employed by the plan sponsor.

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The IRS has updated its rules for required minimum distributions, allowing defined contribution plan participants to withdraw less from their tax-deferred retirement accounts than was previously permitted.

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IRS actuarial tables dictate the asset amounts that individuals are required to withdraw from their retirement accounts starting at age 72, explains Hailey Fields, retirement plan consultant and director of client services at Multnomah Group.

“If you are trying to not take money out of your plan, the good news is you can take less starting this year because the IRS expects you to live longer,” she says.

The IRS rules affect tax-deferred DC plans, profit-sharing plans and individual retirement accounts. Roth IRAs are not subject to required minimum distributions, under IRS rules.  

“If you’re a participant in a 401(k) and you hit 72, but you’re still working, generally you don’t have to take RMDs. You only do if you’re a 5% owner or if you’re no longer working,” Fields says.

The actuarial update is important for plan sponsors to note, but the effect to regular business is limited, as the individuals most affected are likely no longer employed by the plan sponsor, although they may remain plan participants, says Fields.  

“It’s certainly important to the folks who are giving advice to participants about what to do with their investments, how they’re retirement planning,” she says. “For plan sponsors, it’s a good opportunity to review who’s giving advice to participants, and what you know about the quality of the work they’re doing. If it’s your recordkeeper, make sure they understand this change.”

The 2019 SECURE Act raised the age for when DC plan participants must start to withdraw slices of their accumulated savings from a retirement plan. But whereas SECURE raised the RMD age, the IRS’ actuarial tables update “changes the actual amount and how you calculate it for how much you need [to withdraw],” Fields says.

Individuals can calculate the amount of their RMD by dividing the accumulated retirement plan account balance by the updated IRS life expectancy on the agency’s website.

“If you can do your taxes, you can do this,” says Fields. “It’s much simpler. The IRS has three separate tables depending on whether you’re the [asset] owner, the beneficiary or if you have a spouse that’s more than 10 years younger than you—so you have to pick the right chart.”

For a 76-year-old individual that inherited an IRA, they would divide the account balance by 14.1, per IRS rules.  

Fields adds that plan sponsors and their partners at recordkeepers, retirement plan advisers and consultants must take notice of the change to translate it for participants.

“Anyone who is counseling participants on their retirement plan and their distribution options should be talking about this change and what it may mean,” Fields says.

Multnomah will be reviewing the updated changes with clients at meetings, and plan participants are likely to get information from their recordkeeper, she says.

Large tax bills and penalties await individuals who fail to adhere to the update. There are also possible penalties for plan sponsors, because retirement plan fiduciaries owe the same duties of prudence and loyalty to participants who are no longer employed by the company as they do to current, active participants.

Plan participants with questions can consult the IRS or contact their recordkeeper or a tax accountant, Fields says.

“There are pretty steep penalties for not taking your required distributions—you’d end up having to take much more than you would have if you ignore it,” Fields says. “There are also penalties to plan sponsors if it’s discovered that your plan participants aren’t taking their RMD, so it’s in your best interest to make sure that whoever’s processing those, typically the recordkeeper, is doing it appropriately.”

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